Ottawa’s best option: let Mobilicity die: Peter Nowak

Telus is trying yet again to acquire struggling wireless company Mobilicity in a deal worth $350 million after being rebuffed by the federal government twice last year. The difference this time? The moratorium on spectrum transfers from so-called new entrants to big carriers that began five years ago is now up.

Under those original rules, Telus or any of the two other big cellphone companies (Bell or Rogers) would have been free to acquire Mobilicity and its prized airwaves, or even Wind Mobile for that matter, as of early this year. But in June last year, the government changed all that with a new set of rules that gave it the power to review all spectrum transfers. In no uncertain terms, Industry Minister James Moore has repeatedly and ardently stated, “We will not approve any spectrum transfer request that results in excessive spectrum concentration for Canada’s largest wireless companies, which negatively affects competition in the telecommunications sector.”

Not surprisingly, Bay Street is trying to make a case for why the Mobilicity sale should be allowed. Telus would get to take out a competitor – more on this in a second – and it’s also the best possible outcome for the smaller company’s investors. To this extent, some financial analysts are even overstepping their roles in trying to give Moore and the government a face-saving out. As TD Securities analysts wrote in a note to clients last week:

With the passage of time, new entrants in some regions, combined with new regulations (on things such as roaming rates and contract terms), have been resulting in lower prices and increased flexibility for consumers, so Industry Canada should be able to declare victory in its pro-consumer quest without having to block the sale of Mobilicity’s spectrum to an incumbent.

Of course, with the status quo of escalating prices resuming – highlighted by borderline predatory pricing in certain provinces – the government can hardly proclaim its quest to be a “victory.” Indeed, if Moore did as the analysts suggest, it would take about two seconds flat for Photoshopped images to show up online of the minister standing on an aircraft carrier with a banner behind him that read “Mission Accomplished.” The George W. Bush analogy is appropriate, since wireless is quickly becoming the government’s Iraq.

There is no good face-saving way for Ottawa to deal with Mobilicity’s financial problems, and it probably shouldn’t get involved at all. This is, after all, the market forces of business. The company’s investors knew what they were getting themselves into, which was an all-out slugfest not just with the Big Three wireless carriers but also with other low-cost new entrants. Company management had years to engineer a merger with some of those other smaller companies but for one reason or another failed to do so despite everyone’s best advice, including Bay Street analysts.

The chickens may indeed need to come home to roost and Mobilicity may need to be allowed to simply fold, which would actually be good for two reasons: Wind could become stronger by absorbing some of its 165,000 customers, all of whom have compatible phones, and the government could then recall the company’s spectrum holdings since no one would actually be using them. Perhaps it could then gift that spectrum to Canada Post, which could then become a wireless carrier?

At this point, Mobilicity is a dead company walking and can hardly be considered a competitor to the Big Three, so analysts and management are right – a sale to Telus wouldn’t actually hurt competition. But that’s not the point of the spectrum transfer framework; if Moore’s oft-repeated mantra is read carefully, everything important comes before the comma: the government will not approve transfers that result in excessive concentration. With the Big Three already owning a huge majority of the country’s spectrum, the real meaning of the framework is clear: they’re not getting any more through acquisition.

In the end, this third attempt to nab Mobilicity is transparent in its purpose. The government will in all likelihood deny the transfer, in which case Telus and/or the smaller company will ask the courts to decide if it indeed has the authority to do so. They’ll also doubtlessly argue that investments were originally made back in 2008 based on one set of rules, which the government then unfairly changed mid-way through the whole process.

The government, for its part, will use section 7 of the Telecommunications Act to argue that the minister does have the authority to enact such rules since he or she “is responsible for developing policies for spectrum utilization and ensuring effective management of the radio frequency spectrum resource.”

How will it play out? Who knows. Telus could win, in which case the government would be mighty steamed. But in the long game between governments and big companies, corporations often have the advantage. Governments and ministers are, after all, only temporary, but the desire for shareholder returns and therefore the elimination of existing or potential competition is forever.

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6 comments on “Ottawa’s best option: let Mobilicity die: Peter Nowak”

If the government goes with the let Mobilicity fail route the government should at least buy Mobilicity’s spectrum back at the original price that was paid for it so that investors don’t take a complete loss. Otherwise Mobilicity would only be worth the customer acquisition cost for 165,000 customers to Telus or any other bidder since that and the employees would be the only things of value left there.

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